Template-Type: ReDIF-Paper 1.0
Author-Name: Doriana Ruffino
Author-X-Name-First: Doriana 
Author-X-Name-Last: Ruffino
Author-Email: rdoriana@bu.edu
Author-Workplace-Name: Boston University, Department of Economics

Author-Name: Jonathan Treussard	
Author-X-Name-First: Jonathan 
Author-X-Name-Last:   Treussard
Author-Email: jtreussa@bu.edu
Author-Workplace-Name: Boston University, Department of Economics

Title:A Note on Financial Frictions and Risky Corporate
Debt in Relation to Cooley and Quadrini (2001)


Abstract:We o¤er clari?cations on Cooley-Quadrini (2001) as regards ?nancial frictions and
risky corporate-debt pricing. Even in a frictionless world, the promised rate on corpo-
rate debt is not identical across ?rms and across capital structures and it is not equal
to the risk-free market interest rate. Frictions are unnecessary for credit spreads to
arise. Only with risk-neutrality at the macro-level do interest rates on corporate debt
re?ect default-probabilities and in general, assuming that lenders set interest rates re-
?ecting their personal risk-neutrality systematically biases promised rates relative to
market-based rates. To the extent that the ?rm?s entire ?nancial structure is traded
in ?nancial markets, this bias introduces an exploitable arbitrage opportunity.

Length: 12 pages
Creation-Date: 2006-03
Revision-Date: 
Publication-Status:
File-URL: http://www.bu.edu/econ/workingpapers/papers/RuffinoTreussardCQ.pdf
File-Format: Application/pdf
File-Function: 
Number: WP2006-017
Classification-JEL:
Keywords:
Handle: RePEc:bos:wpaper:WP2006-017